Billionaire Warren Buffett is famous for his investing tips. The one I’m about to discuss was a real eye-opener for me. It’s something that, if ignored, could cost me or any other average investor hundreds of thousands over a lifetime.
Here’s the quote: “If returns are going to be 7 or 8 per cent and you’re paying 1 per cent for fees, that makes an enormous difference in how much money you’re going to have in retirement.”
At first glance, that doesn’t seem like a big deal. I mean, of course losing 1% is going to cost me. That’s obvious.
But the reality, which isn’t clear at first, is that this isn’t small change. The amount of money I lose could be nothing short of life-changing. Let me explain.
This table shows how I might invest over a lifetime. I’m saving £500 a month and I receive a 9% return – broadly in line with the recent history of the stock market in this country. And let’s say that I invest from age 28 to 68, which is 40 years of my working life.
|£500 a month|
It looks like I’d build my way up to £2.1m. A nice amount there, enough for a cosy retirement, but I’ll point out that inflation will mean that figure won’t be quite so impressive in the future. Either way, we’ve got a baseline for what to expect from my investments.
Now, I’m going to dial down the percentage return by 1%. I now get 8% on my investments. Let’s look at how that changes things.
|£500 a month|
So, now I’ve built up to £1.6m. That’s half a million less than my previous value, all from only taking a single per cent off the returns. In terms of a percentage, I lose 24% of my money. All from that just 1% less!
If that doesn’t sound right, well, that’s what Buffett is talking about. I expect a 1% cut to slice 1% off what I get, not nearly a quarter of it all!
So how to apply this advice? Well, in short, I have to be aware of how much difference a small change in the percentage can make.
To be specific, if I buy an index fund then it pays to look for low-fee ones. Vanguard is very popular for low-fee funds that track markets like the FTSE 100 or the S&P 500. I invest in a Vanguard fund already and pay just 0.04%.
It’s important for actively managed funds too. While some big hitters might want up to 2% of all returns, I could invest in one like Scottish Mortgage that charges only 0.34%.
The advice is true even if I invest in individual companies. I can reduce my fees by shopping around for brokers or investing in larger chunks. And it’s more proof of how important research is too.
I’ll point out here that while 1% difference can be a game-changer, it doesn’t guarantee anything. All investments in stocks can be risky and I may get back less than I start with.
I’ll end here by showing how this tip goes both ways. In my example, if I add 1% instead of taking it away? Well, I’d end up with a £2.8m nest egg instead. That would suit me nicely, and I imagine I’d start my retirement by saying a big thank you to Mr Buffett.
|£500 a month|